2 Days in the Valley

What the hell is going on?

I love that DALL-E gave the bank a sign that says “BANK.” Now that’s dystopic!

Two things this newsletter is not about are current events and the latest happenings in Silicon Valley. But some weeks the stories are so big – and so closely connected to bigger ideas – that you go where the story is.

The first of these stories was the collapse of Silvergate, a bank that spent most of its existence mired in anonymity. Silvergate was founded in 1988 as a savings and loan, something my older readers will appreciate the irony of. For most of its history it was just a small bank in Southern California. But a decade ago they saw the future and became one of the first banks to become friendly to a then little-known asset known as cryptocurrency. The benefits were stunning.

But this month those benefits ran out. In less than a week we went from financial reporters talking about Silvergate spiraling to their total collapse. In what is a theme this week, it’s always quite complex why anything collapses, let alone a bank. I would never try and boil it down to one factor. But it’s difficult to watch the collapse of Silvergate and not think about the topic of one of our past discussions: Sam Bankman Fried. Since the implosion of FTX, Silvergate’s shares dropped ninety percent prior to their issues last week. This was a house that had already been gutted finally turning into rubble.

I’ve dipped my toes into the controversial topic of cryptocurrency before, both here and on social media. Now that we’re into cryptowinter, the backlash to criticism is much tamer. But during the heyday, if you criticized crypto, you were frequently met with a simple retort: you didn’t understand how it worked. Particularly, the math. But understanding the blockchain was never nearly as important as understanding how money works. Which is rooted in understanding people. And when it comes to money, people want to use a currency that they believe will have the same value tomorrow that is does today. This is why the attempts to downplay FTX’s crime were always foolish. It was a high-profile scam that led people to lose confidence in crypto. It was always going to have a massive fallout and it would always look like this. Math is nice. But confidence is everything.

Which leads us to our next story, one that I suspect far more of you have heard of: the collapse of Silicon Valley Bank. As to what exactly happened, I will leave that to these others I am linking to. But the short version is that this is an old-fashioned bank run, like in Jimmy Stewart’s sixth best movie.

Those articles do an excellent job of dissecting what caused the bank run but, like all bank runs, it was caused by a collapse in confidence in the bank. The major trigger came when Peter Thiel – who I haven’t begged to give me money in a while but please give me money! – encouraged people to withdraw their money from SVB. This was a big deal for a few reasons. One is that Peter Thiel is a massive thought leader in an industry that tends to follow thought leaders. The other is that he’s one of the leading venture capitalists. Many startups had their money in SVB as a condition of their VCs, so having arguably the definitive VC call for this made quite the impact. Flashforward a short time later and SVB was insolvent.

This was a problem because the Federal Deposit Insurance Corporation only insures deposits up to a quarter million dollars. Thus why, and you may have seen this making the rounds this weekend but it’s quite old, NBA superstar Giannis Antetokounmpo keeps his money in fifty different banks so it doesn’t exceed the FDIC limit on any of them. Greek Freak? More like Greek Risk Management Freak! Am I right? Am I right? These jokes are free, people.

Silicon Valley VCs and startups invested massive amounts of money, well beyond the FDIC limit, into a regional bank. That bank was, thanks to laws passed last decade, not subject to the same level of regulation that the big banks are. Regulations put into place after Wall Street tanked the global economy and spiraled the world into a crisis it has yet to extricate itself from. Banks like SVB were deemed to not be “systemically important,” which seems to have not been the case. Leading to the odd scene of numerous VCs, thought leaders, and founders taking to Twitter to beg for their deposits to be insured beyond what the law says. By the end of the weekend the federal government decided to do this in what is – and this is quite controversial for me to say and will lose my readers but my first duty is to the truth – clearly a bailout.

The whole episode was the type of thing that the old money I grew up around – although sadly, not part of – would have considered undignified. And although the internet will have its fun at the Randian ubermensch begging the government for money because they made a bad business deal, that, too, is a caricature. No group should be judged by their worst members. But the whole episode has been yet another blow for what I shall, for lack of a better term, refer to as Silicon Valley.¹ Tech connected banks going belly up. Layoffs continuing while the rest of the economy is mostly fine. The disaster that was cryptocurrency.

Perhaps most interestingly, much of the discourse about how the goings on in Silicon Valley appear to those of us on the outside is starting to ask the most damning question of all: where’s the innovation?

This question is far more interesting to dispense of in a single paragraph. I’ll just note that there’s a reason I’ve now written multiple articles on ChatGPT – and have at least two more coming soon on this topic. It’s the first time in a long time it feels like we’re seeing genuine innovation come out of the tech sector.

Let’s establish two things. First, I am a supporter of Silicon Valley. On the whole they’ve produced great things for society and are a net positive, even if I think it’s sometimes overblown, needs to be fixed, or has bad effects we need to discuss more. But I’m a fan of technology and I believe so strongly in the value of start-ups that my legal practice is devoted to working with them. This is not always a popular opinion on the internet – perhaps ironically? – but it’s one I sincerely hold.

Along with that, I believe there’s a difference between being a supporter and a cheerleader. A cheerleader foregoes intellectual consistency to always claim their team is great. A supporter is willing to admit their team should have signed a midfielder in the summer transfer window. As someone who supports Silicon Valley, it’s incumbent on me to talk about what I see wrong.

Second, many of you are not fans. To many of you, Silicon Valley is the enemy. Some of you have legitimate concerns. Some of you just liked things better when you were younger and you’ve created a narrative that the world was better than, and Silicon Valley is an easy culprit. Of course, it wasn’t better then, and in the ways that it was worse, there are bogeymen far more culpable than Spotify. And yes, I’m embedding that terrible Staind song with Fred Durst so you can remember what life was like before tech freed us from the monoculture. Watch this monstrosity and tell me you really want to go back.

And yet, public perception of Silicon Valley increasingly tilting towards that and away from me. It’s not supposed to be this way. People are supposed to think of them as eccentric titans of industry, not robber barons with meditation rooms. And although I think the reasons for this are complex and varied, there’s a simple reason that also relates to how the two disasters I started this article about occurred: arrogance.

Obviously, I don’t mean that all people involved in tech, or every resident of Silicon Valley is walking around with disdain for the non-coding masses. Rather, it’s an intellectual arrogance, contrasted against intellectual humility, perhaps the most important trait in a world of unlimited information.

The obvious example was one of the high profile voices in the SVB discourse,  the ubiquitous Balaji Srinivasan, whom I’ve already devoted one entire article to a single example of him fundamentally misunderstanding a different field. He wrote an entire book that’s based on not understanding what a state does. And yet, there are millions – concentrated almost entirely in tech – who take his word as gospel. And he is hardly sui generis. Social media is overloaded with “thought leaders” opining authoritatively on areas that they fundamentally misunderstand. SXSW is going on as we speak so I can encounter dozens like this just on my obligatory dog walk while coming up with an idiotic pun for this article name.²

Remember, if you pledge to subscribe and I go paid, 20% of your pledge will go to buy good boy treats for my writer’s assistant. Wow, this was shameless. I’m genuinely embarrassed. Not enough to delete it though.

This sense of having conquered one area so being able to conquer all is not, by any means, found only in Silicon Valley. Just look at the number of sports stars who think they are also wise businessmen, great performers, or uhh, whatever the hell you’d describe the TB12 Method as. Titans in one area have thought they were titans in all since the days of actual titans.

And what many in tech have accomplished is legitimately impressive. The mixture of technical ability, creative ability, work ethic, business sense, and sheer entrepreneurial guts is not just laudable but something I believe we should gear more of our society towards. As far as I’ll discuss politics – which isn’t far! – I’m in favor of policies that make the only obstacles to entrepreneurs having the idea and the skills to execute.

But that also doesn’t mean that just because you’ve done all that, you understand finance. Or risk management. Or government. Or warfare. Or transportation and urban architecture.³ Or any of a thousand other fields. And – in a preview of a future article – as tech becomes more specialized and more cloistered from society, it’s likely to get less useful to society. There’s a reason most of our greatest innovations came from generalists, amateurs, and failures. There’s also a reason that the same group that gave us personal computers, smartphones, online retail, podcasting, social media,⁴ search engines, streaming, Wikipedia, and other societal altering innovations has been reduced to spending the last half decade hawking crypto and trying to sell us on Web3. Fundamentally misunderstanding the industries you’re trying to disrupt doesn’t lead to disruption, it leads to destruction.

Maybe Silicon Valley is not fundamentally broken, but just having a bad moment. But something is wrong. Is it a correctable blip? Or will using Silicon Valley as a synonym for innovation and the best that America has to offer about to become as outdated as it is for another place that once held that title, Detroit?

I don’t know, and, again, first duty to the truth, I want to wring another article out of this. But I’ll note this. There’s a book (and movie) called The Smartest Guys in the Room which is about a group that were so brilliant they ended up being the last white-collar criminals to manage to get sentenced to jail in America. At the end of the day, no matter how smart you are, it’s more important to not think you’re smarter than that.

1. Silicon Valley being synonymous with all of what is broadly considered the “tech” industry, whether located in Seattle, SoCal, Austin, or anywhere else. I should note that I hate doing this but I’m a populist and this is what the people do, so I relent.

2. Instead of a pun I went with an obscure 90s movie reference.

3. Did you think I would write 2,000 words criticizing tech without ripping on those damned scooters?

4. Here I’m using the broad version of social media which includes such things as blogs and YouTube.